T4 GLOBAL ECONOMY Flashcards
How will quantitative easing affect the exchange rate of a currency?
Supply of the currency will increase causing it to depreciate
Who intervenes if a currency moves beyond its fixed rate?
central bank
what is hot money
refers to capital that moves quickly across borders in search of short-term gains.
What impact will an increase in demand for Argentinian pesos have on the exchange rate?
Appreciation
How can a country maintain a fixed exchange rate
Changing interest rates
Or by using foreign currency transactions
To competitively devalue a currency policy makers need to
Decrease interest rates
Increase supply of domestic currency in international markets
Why does decreasing interest rate depreciate the exchange rate
When a country’s central bank lowers its interest rates, the returns on financial instruments like bonds and savings accounts decrease.
This makes these domestic assets less attractive to both domestic and foreign investors, reducing the demand for the country’s currency.
What is meant by exchange rate
the price of one currency in terms of another currency
How can a country change the value of their fixed exchange rates?
Revaluing or devaluing the currency
What is revaluation
When countries increase the value of their fixed exchange rate
What is devaluation
When countries decrease the value of their fixed exchange rate
Managed exchange rates keep currency fixed within a predetermined..
Range
How does a reduction in imports affect the value of the UK’s exchange rate?
In order to buy imports, consumers must purchase foreign currency. To do so they must sell (or supply) pounds. This means that a decrease in imports will lead to a decrease in the supply of pounds which in turn will lead to an appreciation of the pound.
How does an increase in the base interest rate affect the value of Australia’s exchange rate?
Appreciation
If the Reserve Bank of Australia increases its interest rate, the demand for Australian dollars will increase.This is because hot money investors searching for a high interest rate will want to save in Australia.
What are the two types of exchange ratess
nominal and real
What are the three types of exchange rates systems
Fixed, managed and floating
What is a fixed exchange rate
The government fix the value of one currency to another
What is a floating exchange rate (2)
the value of a country’s currency is determined by the foreign exchange market, based on supply and demand relative to other currencies.
The government or central bank does not intervene at all
What is the nominal exchange rate
The price of one currency in terms of another
What is the real exchange rate
Real ER = (Nominal ER * domestic price) / Foreign price
Name three measures of international competitiveness.
Export prices, Unit labour costs, Global competitiveness index.
Why do low export prices make a country more competitive
If a country has low export prices foreign consumers are more likely to buy its exports meaning it is more competitive.
How is unit labour cost worked out
Total wage spending / total output
What does the Global Competitiveness Index seek to measure that other measures of competitiveness cannot?
infrastructure, macroeconomic stability, health, education, innovatio
What does the global competetiveness index measure and who measures it
measures a variety of factors, including infrastructure, health, education and technology.
it is calculated by the World Economic Forum
definition of: International Competitiveness
A country is more competitive if their exports are sold at a lower price or a higher quality than other countries.
What four factors influence a country’s international competitiveness?
Exchange rates.
Wage costs.
Non-wage costs.
Supply-side policies.
A country’s international competitiveness will decrease if its currency…
appreciates
WHAT DOES SPICEE stand for
Stronger
Pound
Imports
Cheaper
Exports
Expensive
What happens when currency depreciates to international competitiveness
An exchange rate depreciation will decrease the price of exports and cause an increase in international competitiveness.
What does price level refer to
he average of current prices across the entire spectrum of goods and services produced in an economy.
How will an increase in wage costs affect international competitiveness
An increase in wage costs will increase the cost of production and lead to a left shift of the short-run aggregate supply curve.
This will cause the price level to increase and make the country less internationally competitive.
How does a lower corporation tax make a country more competitive
A lower corporation tax means that they have lower non-wage costs. A decrease in non-wage costs shifts SRAS to the right and decreases the price level meaning exports can be sold at lower prices. This makes them more competitive.
what are some non wage cost
pension contributions
coportaion taxes
What are the factors influencing exchange rates (6)
imports and exports
Speculation
relative inflation rates
FDI
relative interest rates
QE
What effect will a decrease in imports have on exchange rates
A decrease in imports will cause supply of pounds to fall as less people sell their pounds for foreign currencies to purchase imports.
This will appreciate the exchange rate
What is speculation in the context of currencies
When investors predict changes in a currency’s exchange rate to make a profit.
What does the supply and demand pound diagram look like
If argentina increases its base interest rate what three things will happen in the SR?
increase of hot money flowing into Argentinian
increased demand for Argentinian pesos relative to other currencies
outward shift of the demand curve for Argentine Pesos
France’s inflation rate is 9% and Australia’s inflation rate is 2%.
What is likely to happen to France’s exchange rate?
It will depreciate because consumers are decreasing their demand for French exports
How does a lower relative inflation rate affect a countries exchange rate
Lower inflation rate means lower increase in price level leads to relative cheaper exports, causing demand for a currency to increase causing it to appreciate
A net FDI inflow is likely to cause a currency
appreciation
What is meant by FDI
A Foreign Direct Investment is an investment made by a firm in one country into a firm in another country to gain control over the foreign firm.
What is QE
Quantitative easing is when a central bank creates new money to purchase financial assets from high street banks. This increases the supply of pounds and causes the currency to depreciate.
How is an appreciation of the Chinese exchange rate likely to affect Foreign Direct Investments going into China?
Investing in China will become more expensive and so FDI will decrease
Following a depreciation, why might the Current Account worsen in the short run?
If import demand is price inelastic.
What does the J curve show
Following a depreciation of the exchange rate, the J-curve effect shows a worsening of the Current Account in the short run and then an improvement in the long run.
What is Competitive Depreciation
When a country depreciates their own currency to keep their exports cheap and competitive.
What is a currency war
A currency war is when countries depreciate their exchange rates to make their exports more competitive than other countries’.
Describe the shape of the J curve when a country experiences a depreciation of its exchange rate
In the short run, demand for imports is inelastic meaning a depreciation will increase import expenditure and worsen the Current Account. Shown by a slope downwards by the J curve
As demand becomes more elastic over time (like when companies finish their contracts), the demand for imports decreases leading to a decrease in import expenditure. This will then improve the Current Account and the curve will slope up.
What is the marshall lerner condition?
The Marshall-Lerner Condition states that a currency devaluation will improve a country’s trade balance if the sum of the absolute values of the price elasticities of demand for exports and imports is greater than one.
What is PEDx + PEDm equal to in the short run
< 1 as they are both inelastic meaning they will be small numbers.
What is PEDx + PEDm equal to in the long run
> 1, in the long run ped for exports and imports is more elastic.
What two methods are there of managing exchange rates?
changing interest rates, foreign currency transactions
What monetary policy should policymakers use to appreciate the exchange rate?
Raising Interest Rate
Reducing money supply
What are infant industries?
Infant industries are industries which are too young to benefit from economies of scale as they are producing a low level of output.
What is the impact of the sale of huge amounts of yuan on the currency market?
Selling yuan will increase the supply of yuan available in the currency market. This will shift supply to the right and decrease (depreciate) the exchange rate.
A tourist is visiting America from the United Kingdom. Why might it be useful for them to know the real exchange rate?
It gives them more information about the amount of goods and services they will be able to buy when they convert their pounds to dollars
What is a currency war?
When countries depreciate their exchange rates to make their exports more competitive
What is meant by the real exchange rate (not formula)
The real ER tells us how much a currency is worth relative to the prices of goods and services in another country.
what is the equation for the real exchange rate
nominal exchange rate x domestic price level) / foreign price level
What is meant by the balance of payments
The Balance of Payments is ameasure of alltrade transactions between one country and the rest of theworld.
Describe the four parts of the Current Account:
- Trade in Goods
- Trade in Services
- Investment Income
- Current Transfers
What does a ppf show
A production possibility frontier shows the maximum potential output of the economy, using all resources efficiently.
What is the theory of comparative advantage
if countries specialise in the production of the goods in which they have a comparative advantage, global output will increasev
What three assumptions does the theory of comparative advantage make?
First, it assumes that the average cost of production is constant
Second, it assumes that there are no trade barriers
Third, it assumes that there are no transport costs
Three types of diseconomies of scale
ABC
What are the advantage of specialisation and trade
Leads to an increase in global output and living standards
May create economies of scale
Can lead to lower prices and more choice for consumers
What are the disadvantages of specilisation and trade
Benefits are based on unrealistic assumptions
May lead to over dependence on imports and exports
Can cause demotivation which will decrease productivity and increase prices.
what is globalisation
the increased integration of different economies around the world.
Impact of Globalisation on Consumers
Globalisation has led to an increase consumer choice and lower prices but it has arguably reduced happiness.
Impact of Globalisation on Workers
Globalisation has led to an increase in international job opportunities but increased structural unemployment.
Impact of Globalisation on the Environment
Globalisation has increased international cooperation to fight climate change but it has increased global warming.
What are the five characteristics of globalisation
Increased international mobility of labour
Increased international mobility of financial capital
Increased specialisation
Increased international trade
Increase in gdp to trade ratios
What are the four main causes of globalisation?
Improvements in transport.
Improvements in IT.
Improvements in shipping such as containerisation.
Trade liberalisation
what are the 4 factors that influence a countries terms of trade
price of raw materials
changes in relative inflation rate
change in exchange rate
changes in tariffs
What is meant by the terms of trade
measures the relative price of a country’s exports compared to its imports
the correct formula for terms of trade?
index of export / index of import * 100
What is a trading bloc
an agreement between countries to reduce or eliminate trade barriers
What are the different types of trading blocs
Free trade area
customs union
common market
monetary union
what is meant by a customs union
Trade barriers are removed between member countries
Common external tariff on countries outside trading bloc
What is meant by a free trade area
a bloc where trade barriers are removed.
What is meant by a common market
removes all trade barriers between member countries
and a common external tariff on non-member countries
free movement of factors of production.
What is meant by a monetary union
removes all trade barriers between countries
common external tariff on non-member countries
countries adopt the same currency
What is trade diversion
When trade is diverted from low cost producers outside a trading bloc to high cost producers inside a trading bloc
What is the eurozone
a monetary union where 20 members use the Euro
What kind of trading bloc is the European union
A customs unions - trade barriers removed and common external tariffs includes 27 countries
What is the European single market
A common market that includes 31 countries
What are the functions of the wto (2)
to organise rounds of talks in which trade deals are negotiated in order to try to reduce trade barriers and increase trade
settle trade disputes which occur when one member thinks another member is breaking the rules of a trade agreement.
What is the WTO
The world trade organisation is an organisation of 164 countries that regulates world trade.
What is the World Trade Organisation’s position towards trading blocs?
They support trading blocs that lead to trade creation and don’t support those that lead to trade diversion
What is trade creation
When the removal of trade barriers leads to an increase in trade
What is the bali packagee
The Bali Package was agreed at the WTO Ministerial Conference in 2013. It aimed to create trade for developing (poorer) countries by reducing the trade barriers that they face with developed (richer) countries.
What are the four factors which influence patterns of trade
comparative advantage
emerging economies
trading blocs
exchange rates
how do comparative advantages affect the patterns of trade
If a country can produce a good at a lower oppurtunity cost than another they will produce more of it and the competitor may produce less of it
How do emerging economies affect the patterns of trade
As an emerging economy develops they now import and export far more goods and services.
How do trading blocs influence patterns of trade
Trading blocs can lead to trade diversion and trade creation within blocs, both of which change the patterns of trade
What is the Impact of Exchange Rates on Pattern of Trade
An exchange rate appreciation will lead to an increase in imports and a decrease in exports.
What component of the Balance of Payments do Current Transfers fall under and what are they?
A component of the Current Account, which includes money that is transferred abroad without getting any goods or services back in exchange.
what is meant by an economy’s income balance
we need to find Investment Income received and subtract the Investment Income sent abroad.
What is hot money
Money that investors move internationally between banks to maximise the interest they receive
What is meant by Foreign Direct Investment and where is it recorded in the balance of payments?
FDI is recorded in the Capital & Financial Account and shows investments made by a firm to gain control over a foreign firm
What 6 factors affect a countries current account
exchange rates
relative inflation rates
productivity and costs
quality
growth
protectionism
How does low productivity affect a countries current account
Low productivity leads to an increase in costs which leads to a
worsening of the current account.
What happens to an economies imports as the average income rises
fewer inferior goods
more normal /luxury goods
What is the impact of a current account deficit on AD
usually caused by an increase in import expenditure and/or a decrease in export revenue. This will lead to a decrease in aggregate demand
What are the methods a government can you use to reduce current account deficit
Supply side policies
Expenditure switching policies
expenditure reducing policies
How can expenditure reducing policies reduce the current account deficit
The government can attempt to reduce a Current Account deficit by reducing overall expenditure.
They can do this by increasing income tax or lowering benefits
This will have the effect of reducing expenditure on imports which in turn should reduce the deficit by ensuring that less money is leaving the economy.
What are the two types of expenditure switching policies
- Use of trade barriers such as tariffs
- Lowering of interest rates
What are two types of transactions that appear in the capital and financial account
Foreign Direct Investment and hot money.
What are some supply side policies that could improve the UK’s current account trade balance
Reducing corporation tax
Reducing minimum wage
What is foreign direct investment
An investment made by a firm in one country into a firm in another country, to gain control over the foreign firm.
What is a transnational corporation
A transnational corporation is a company that operates in two or more countries.
What are two ways government can promote fdi
reduce corporation tax
reduce wage costs
